To understand how the marital deduction and personal estate tax reduction might work in practice, suppose Bob dies in 2004 leaving an estate worth $5 million. Putting aside community property issues for the moment, assume that his will dictates that $3 million go to his wife, and $2 million to his daughter Kate. In this situation, no part of the $3 million Bob leaves to his wife will be subject to the estate tax (as long as Bob's wife is a U.S. citizen and no nondeductible terminable interest exists). However, of the $2 million Bob leaves to Kate, $500,000 will be subject to the estate tax (the $2 million total less the first $1.5 million that is tax-free under the 2004 personal estate tax exemption).

Other deductions. Other deductions against the gross estate include certain administrative expenses, funeral expenses, claims against the estate, certain taxes and other indebtedness and charitable bequests.

Filing the Estate Tax Return

The executor, personal representative, or person in possession of the estate's assets must file the estate tax return within nine months of the decedent's death. The estate can apply for a six-month extension of time to file, but the taxes must be paid within nine months of the decedent's death. The time for payment of the estate tax may be extended in certain circumstances.

State Estate Taxes

Some states also impose estate taxes. The state in which the decedent lived may impose an estate tax, and states where real estate or personal property is located may also impose an estate tax. The law of each state having any connection to the property in question must be consulted in order to assess any tax consequences associated with the property transfer. A skilled estate planning or taxation attorney can help make such a determination.

Gift Tax

The gift tax is a tax on the legal transfer of property from one person to another, during the giving person's lifetime. Certain gifts are exempt from the gift tax. These include: